United States / Commercial Banking
Don’t Self-Diagnose Your Portfolio – Visit a “Doctor” Instead
by Vilan Trub
Aug 18 2018

A growing concern in the digital age is self-diagnosis. Often now, when people feel ill or notice an abnormality on their person, they visit a website such as WebMD, instead of being reasonable and visiting a trained professional such as a doctor. A portfolio behaves like a living and breathing entity and a finger should always be kept on its pulse. When identifying the current state of a portfolio, one shouldn’t opt for self-diagnosis, searching Google and playing a guessing game with what is essentially the wild west of unverified data. Market research is a professional process conducted by professional analysts. Their sole responsibility is accumulating and processing information, the very same information that can answer vital questions regarding the current health of that portfolio.

Key Question to Ask

What information is needed for a thorough portfolio risk assessment?

To understand the current health of a portfolio is a process that requires breaking of the portfolio seal, separating the innards and taking a closer look at where your money is currently holed up. What are the industries and how specific can you segment your loan distribution? Simply looking at the oil industry or manufacturing industry doesn’t give you the full picture you need in order to determine “what’s happening?” The NAICS classification system touches six digits in order to identify as specifically as possible, atom by atom, how our economy is constructed. The reason is because the importance in being able to collect, analyze, and publish such data serves great importance in understanding the current state of industry. Factors such as regional and local economic climates can have a tremendous impact as well, aside from the macro influences that often act as a tree, blocking a forest of information behind. It can make one’s head spin just trying to sort out how many streams of vital data there are, which is why it’s important to tackle data collection with professionalism and due diligence.    

Key Benefit

Information backed risk assessment can positively impact future loan decision making

What defines a loan as intelligent is industry prospects AND how it impacts the balance of the overall loan portfolio. Mitigating risk means looking close at the current state of the industry of both the prospective loan destination as well as current loans already distributed. If a big bulk of the portfolio is invested in sectors that, according to market research, appear to have a growing risk due to industry or political changes, an intelligent course would be to seek out clients outside of those sectors, showing stronger growth. It not only leads to an intelligent loan, but also dilutes the current risk of the overall portfolio.  

For any professional within the commercial banking world, a lengthy piece covering the importance of accessing optimal information sources is a refresher on what should have long ago become obvious. Market research is a rich resource compiled by analysists dedicated to the single task of mining and evaluating data. Like ants working tirelessly to expand an underground hive, reports are compiled and updated regularly that shine a light on which way the wind is blowing. IBISWorld oversees 700 industry reports at the 5-digit NAICS level. Each report not only provides historical metrics and analysis, but also a five-year forecast. No industry operates out of context, so the “underground hive” amounts to a comprehensive network of industry information. Moreover, each industry report has a Risk Rating report that provides a detailed scoring of risk over the next 18 months.  

Industry Report

Sometimes it’s obvious when risky loans are mounting up. Often times it’s a riddle, wrapped in a mystery, inside an enigma. Winston Churchill used those words in reference to forecasting the actions of a seemingly unpredictable nation. He also believed there was a key to intelligently predicting their plotted course, and he was right. There exists a key today as well in forecasting industries and identifying economic trends. The person who holds that key maintains a healthy portfolio that is prime for growth. A healthy portfolio, aside from being its own reward, causes a wide-reaching ripple effect. It establishes a track record of trust and credibility. It also encourages better quality business. Being healthy has its benefits, but staying healthy requires help.